Employers in the building and construction industry enjoy the benefit of unique rules that considerably limit the circumstances under which they are required to pay withdrawal liability following the cessation of their obligation to make contributions to a multiemployer pension plan. Whereas most employers automatically face withdrawal liability assessments when they cease to have the obligation to make pension plan contributions, construction industry employers need not pay withdrawal liability if they discontinue "covered work" in the jurisdiction of the collective bargaining agreement under which they are required to make contributions to the pension plan for at least five years.
A recent ruling by the U.S. Court of Appeals for the Tenth Circuit, Ceco Concrete Construction, LLC v. Centennial State Carpenters Pension Trust, et al. (10th Cir. May 3, 2016) (86 PBD, 5/4/16), illustrates, however, that construction industry employers must be mindful of the activities of companies within their "controlled group," which could potentially expose them to withdrawal liability that they would otherwise escape.
The Building and Construction Industry Exception to Withdrawal Liability
Withdrawal liability under Section 4203(a) of the Employee Retirement Income Security Act is triggered upon a "complete withdrawal" from a multiemployer pension plan. A complete withdrawal under Section 4203(a) of ERISA occurs when the employer permanently ceases to have an obligation to contribute to the plan, or permanently ceases all covered operations under the plan.
For employers in the building and construction industry, however, Section 4203(b)(2) of ERISA provides an exception, pursuant to which a complete withdrawal occurs only when an employer: (1) "ceases to have an obligation to contribute under the plan," and (2) either (a) "continues to perform work in the jurisdiction of the collective bargaining agreement of the type for which contributions were previously required" or (b) "resumes such work within 5 years after the date on which the obligation to contribute under the plan ceases, and does not renew the obligation at the time of the resumption."
Irrespective of the industry in which an employer is engaged, ERISA defines the term "employer," which extends not only to the entity that executes the agreement requiring contributions to be made to the plan, but also all "trades or businesses" under "common control" with that entity. See Section 4001(b) of ERISA. This is known as the employer's "controlled group." By virtue of this definition, companies can become liable for withdrawal liability even if they never directly entered into a collective bargaining obligation to contribute to the plan.
And, as the recent Tenth Circuit ruling demonstrates, a construction industry employer's ability to withdraw from a plan without incurring withdrawal liability obligations can similarly be impacted by the activities of other entities within its controlled group.
Ceco Concrete Construction's Withdrawal Liability Assessment
Ceco Concrete Construction LLC ("Ceco") was signatory to a collective bargaining agreement ("CBA") with the local carpenters union in Colorado that was effective until April 30, 2010. The agreement required Ceco to make contributions to the Centennial State Carpenters Pension Trust (the "Pension Plan"). Once the CBA expired, Ceco chose not to renew the CBA, and shortly thereafter, it ceased all operations in Colorado. At the time the agreement expired, Ceco was a subsidiary of Heico Holdings, Inc. ("Heico"), a national construction firm.
Several months later, Heico acquired CFA, another construction company working in Colorado. CFA was a non-union company and did not independently have an obligation to contribute to the Pension Plan. The Pension Plan thereafter assessed Ceco with withdrawal liability, taking the position that, by virtue of their common ownership by Heico, Ceco and CFA were trades or businesses under common control, and thus CFA's non-union work within the jurisdiction of the CBA precluded Ceco from taking advantage of the building and construction industry exception.
Following Ceco's challenge to the assessment of withdrawal liability, an Arbitrator ruled that Ceco was not liable to the Pension Plan because, even though CFA was performing covered work in the jurisdiction of the CBA within five years of the cessation of Ceco's obligation to contribute to the Pension Plan, the two entities were not under common control on the date Ceco's obligation to contribute to the Pension Plan ceased.
Federal Court Litigation
Ceco filed a lawsuit in federal court in Colorado to confirm the Arbitrator's award. Among other things, the district court upheld the Arbitrator's decision that Section 4203(b)(2) of ERISA mandated that withdrawal liability applies only to entities under common control at the time the obligation to contribute to the pension plan ceases, and thus, Heico's subsequent acquisition of CFA, and CFA's performance of covered work, therefore did not trigger a withdrawal by Ceco. See Ceco Concrete Construction, LLC v. Centennial State Carpenters Pension Trust, et al., 75 F. Supp. 3d 1328, 1336-39 (D. Colo. Dec. 18, 2014) (245 PBD, 12/23/14).
On appeal, the Tenth Circuit reversed, holding that the district court's reasoning did not comport with a plain reading of Sections 4001(b)(1) and 4203(b)(2) of ERISA. The Court ruled that ERISA “allows a pension plan to assert withdrawal liability against any entity under common control on the day the common-control group triggers a §1383(b)(2) [4203(b)(2)] withdrawal by continuing or resuming covered work.” As applied here, the Court stated that the Pension Plan was authorized to assess withdrawal liability against Ceco once CFA became a controlled group member and engaged in work within the jurisdiction covering Ceco's prior work, since CFS's work occurred within the five years after Ceco no longer had an obligation to contribute to the Pension Plan.
In so holding, the Court made several significant observations. The Court observed that the constitution of controlled groups under ERISA is “not static,” and thus can change over time as trades or businesses come in and out of common control. The Court further noted that a complete withdrawal under Section 4203(b)(2) can occur at any time within the five-year period after the employer's obligation to contribute ceases, and therefore, a plan must continue to evaluate a controlled group's operations within the five-year period to determine whether a withdrawal occurs. Lastly, the Court opined that its interpretation advances ERISA's statutory intent. According to the Court, limiting the determination of controlled group status to the time the employer's obligation to contribute ceases would allow withdrawing employers to escape withdrawal liability even when businesses related to them have resumed covered work within the five-year statutory period (without renewing an agreement to make contributions to the plan).
Pension plans and employers in the building and construction industry should consider carefully the implications of the Tenth Circuit's ruling. From the plan's perspective, the ruling demonstrates the need to remain diligent in monitoring the activities of employers who have ceased their obligation to contribute to the plan because, even if these employers engage in no additional covered work, because they may become connected to employers who do perform covered work, thereby triggering a withdrawal.
Conversely, building and construction industry employers need to be mindful that they cannot necessarily escape withdrawal liability simply by disengaging from a collective bargaining agreement and resolving that they will discontinue covered work within the jurisdiction of the collective bargaining agreement. Withdrawal liability may yet be assessed if they become related, directly or indirectly, through a controlled group to companies that are engaged in work within the jurisdiction of the collective bargaining agreement.
Originally published by Bloomberg, BNA. Reprinted with permission.